This episode of the Your Recipe for Financial Success podcast was published on 13th August 2020. You can listen again by heading to our Episodes page, or on your favourite podcast player.

In this episode, Becky, Emma and Julie introduce the ingredients needed to rustle up a steaming pot of Income Protection.

Episode Highlights

Would you be able to support yourself financially if you were unable to work due to illness or injury? Or, would the statutory sick pay of £95.85 per week for 28 weeks see you through?

No? Well then, you’ll probably want to think about protecting yourself.

Income Protection

  • If you are unable to work due to illness or injury, your income is protected and you will still receive money to support yourself. It will pay out until you are able to return to work, or you retire.
  • You can choose a waiting period before your policy begins to pay out. The longer you are able to support yourself before needing the pay outs, the lower your premiums are likely to be.
  • Income protection is not a one-off lump sum. You can claim more than once on the same policy if necessary.
  • If you are working age and you don’t have savings to fall back on or the state benefits wouldn’t be enough to cover your outgoings, you should seriously consider Income Protection.

Critical Illness Cover

  • This pays out as a single lump sum payment. It means that you will have to make the money last until you are able to go back to work. If you suffer an injury which means you are unable to work again, this kind of cover may not be suitable. Especially for younger workers.

 

We hope you are full up on everything you need to know about income protection. If it’s left you hungry for more, check out our other podcasts on our episodes page. Don’t forget about our Facebook page too where you can ask questions and join in discussions about all of our topics!

 

Rediscover the conversation

Becky Campion 
In today’s episode we are going to be sifting through the ingredients that you need for Income Protection. So, Emma why don’t you start off by telling us what Income Protection actually is?

 

Emma Knights 
Income Protection, or some people might know it as Permanent Health Insurance does just what it says on the tin. What it does is protect your income if you can’t work, whether it be through illness or injury. It means you will have an income which is going to continue until either you are able to return to work or maybe you just retire.

 

Julie Hunt 
OK that sounds pretty good. So, if I was ill tomorrow would the plan to start paying out straightaway if I couldn’t work?

 

Emma Knights 
It depends completely on the options you selected when you initially set up your policy. You would choose a waiting period, which is also known as a deferred period. What that means is, you would choose a period of time, so say four weeks, and then after four weeks of being unable to work, the plan would then start to replace your income.

You still need to have some money behind you in the bank or somewhere just for those first few weeks before the plan does start paying out to you.

 

Becky Campion 
So, it pays while I’m ill and off work? What happens when I’m better and return to work?

 

Emma Knights 
So that’s another really important feature of Income Protection. What it does is pays you money until you go back to work, obviously you’ll then go back to work and have your usual income and won’t need the plan pay-out.

If you were to fall ill again or had another injury the plan is going to pay out again, meaning that you could make another claim on the same policy.

 

Julie Hunt
That sounds pretty good. Isn’t that the same as Critical Illness Cover?

 

Emma Knights 
Not quite, critical illness would just give you one lump sum payment.

For example, it might give you £50,000 if that was what you were covered for, and that would have to last you for the entire time you’re off. So, if you are in your early 20s say, and it was meant to last until your retirement, is that £50,000 really go into last?

An Income Protection policy is going to give you a regular income for the period of time that you’ve chosen to cover you for.

 

Becky Campion 
So, scare us Emma, when should we think about getting an Income Protection policy?

 

Emma Knights 
Well, possibly now. If you’re working age, and worried that if you were ill, and you didn’t have an income or any benefits you wouldn’t have enough money to cover your outgoings then you probably need it right now.

 

Julie Hunt 
I’ve got a bit of a confession; I actually have an income protection plan which I took out when I was 18 when I first started working in the industry. Because it was on staff rates at the time, I’ve never cancelled it because it’s such a good plan.

 

Emma Knights
Have you just got that plan now or have you got an additional one too?

 

Julie Hunt 
I have an additional one, and they are both increasing.

 

Emma Knights 
That’s okay then, the only reason I was saying that is I’m guessing your income back then was probably very different to what it is now.

It’s always good to make sure that we review our policies, and that we’ve got the adequate cover in place. When you’re looking at Income Protection you need to ask yourself a few questions. If the answer’s no to any of these questions, then Income Protection could probably help get you out of a very sticky situation.

So, the first question to ask yourself is: could you survive on just a sick pay? So, when we’re talking about sick pay, think about your employer. Some employers would only give you statutory sick pay. Some may give you six months full pay or six months half pay. It’s going to vary for everybody and be very, very different. But you need to consider in your situation, would that income last?

 

Julie Hunt 
I think also what if you just changed job recently is something to think about as well.

 

Emma Knights 
Definitely because some employers will put a limit on it and not obviously pay out immediately, you’ll have had to have worked there for a certain amount of time before you’ll get that benefit.

The next question is: could you survive on any benefits you may be entitled to from the government? If you’ve been injured it may be that you may be entitled to some kind of allowance from the government as well.

So, whilst they’re really, really helpful for most people that have had a half decent job with a regular income for quite some time, it’s unlikely that the benefits from the state are going to be enough to cover all of your outgoings.

Another thing to think about is whether you have enough savings. Like I said earlier, being at a young age, if you were unable to work now through to retirement would you be able to afford it? I’m 27 at the moment and I know that I definitely couldn’t survive until my state retirement age of 68 with the savings that I have at the moment. I wish I could, don’t get me wrong, but I definitely can’t.

Another question to ask yourself is whether you could you take early retirement from work if you couldn’t do your job anymore?

The final thing to think about is whether your family could support you? Do you think your family would be able to support either of you if you couldn’t work anymore?

 

Becky Campion
I know with me and my husband we could probably be okay for a little bit of time. Anything over probably three or four months we’d then have to start cutting out the finer things in life, shall we say?

 

Emma Knights 
Yeah. And once you’ve moved out of home and you’ve got your own independence, you wouldn’t want to be going back to parents and relying on family to be helping you in the situation either. So, like I say, these are all really important things to consider when thinking about Income Protection policies.

 

Becky Campion
You’ve already mentioned things like statutory sick pay from the government, can you tell us a little bit more about that?

 

Emma Knights
Of course I can. Like I say most people that are employed would receive some kind of sick pay. But statutory sick pay is at the moment, around about £98.85 per week. I say ‘around about’ but that’s very precise amount that I have quoted! That works out to approximately £5,100 per year. I don’t know about you, but that sounds like a massive pay cut to me.

 

Becky Campion 
Yeah, I agree.

 

Emma Knights 
So, your statutory sick pay can only be paid by your employer for up to 28 weeks. Then after 28 weeks that money would stop.

Obviously it is very important to make sure you’ve got some cover in place. But as I said earlier, you can have a deferred period on an income protection plan. So, if you know that you were going to be getting, or you could be entitled to statutory sick pay from your employer, you may choose to take a deferred period on an Income Protection policy of 28 weeks.

You know that you would be getting £98.85 per week for 28 weeks and then after that you’d start getting your money from your policy that you’d put in place. It may be a case of taking a big pay cut, initially, but it would see you through.

 

Julie Hunt 
What about if £98.85 was just an unrealistic amount of money to live on?

 

Emma Knights 
Then, you don’t have to wait 28 weeks to start receiving an income from an Income Protection policy. You can still take out a policy with a shorter deferred period, they will only normally pay around of 60-70% of your ‘usual’ income. If you’re getting say around about £100 a week from your statutory sick pay. They’ll then top it up to what 60% of your normal income would be, and pay out that amount to you.

 

Julie Hunt 
I guess the plans are set up like that so you have some sort of incentive to actually return to work.

 

Emma Knights 
Definitely because how many people would just sit at home and do nothing if they thought that they could get paid exactly the same as if they actually went to work?

 

Becky Campion
Yeah, I reckon quite a lot of people would take you up on that offer!

 

Emma Knights 
I think so too. So, that’s definitely in place to make sure there’s an incentive to go back to work. But I guess also the protection is there if you really can’t go back to work. Some people would be desperate to work but obviously can’t due to various sicknesses and illnesses.

 

Becky Campion 
You’ve talked about employed people, what about self-employed people?

 

Emma Knights 
So, this is going to be a massive advantage to self-employed people, because they’re obviously not going to have any entitlement at all to statutory sick pay because they don’t have an employer.

Say they’re a tradesperson who relies on going out and physically building or doing something physical every day. If they’ve got a broken arm or broken leg and they can’t go out and do it, then is more than likely that that their income is just going to stop immediately.

Like we said before, if you haven’t got a huge amount of savings behind you, it’s really good to have something in place.

So, what you can get with an Income Protection policy is something called ‘Day One Cover’. This means that you don’t necessarily have to wait four weeks, 28 weeks, or whatever that deferred period you’ve chosen is. You can have it so it pays out from, literally, day one. If you are unable to work from tomorrow, contact the insurer and as long as you can provide them with the evidence they need, the payments could start immediately.

I will just add in here that, at the moment, lots of providers are very very reluctant to issue Day One policies because of the Coronavirus. There are still options out there though so if it’s something that’s really important to you it’s worth looking for.

 

Julie Hunt 
So how do I go about applying an Income Protection plan?

 

Emma Knights 
There’s lots of different ways. You can get quote and apply for cover yourself online through price comparison websites.

You don’t want to set up a plan online yourself, only to find out that it doesn’t do what you thought it did.

Like if you were to use self-raising flour in a recipe when actually you needed plain flour, because that’s going to end up being a bit of a disaster.

In this case, obviously, it’s always worth speaking to a financial adviser for any help and advice. That means you haven’t got to just make all those decisions on your own, you’ve got someone you can talk your situation through with. You can explain exactly what your situation is and have some help and advice to choose what level of cover you’d need.

 

Julie Hunt
That’s great. Thanks very much.